The Hindu Business Line : Indian equity market still attractive on P/E ratio

DESPITE several foreign broking firms downgrading the Indian equity market compared to other Asian emerging markets, Indian stocks continue to remain attractive on the price-earning (P/E) ratio, price to book value and dividend yield, according to market experts.

Based on these three parameters, the Indian equity market is not overvalued compared to other markets such as China, Taiwan, South Korea, Thailand, Indonesia, Malaysia and the Philippines.

Under a normal course a lower P/E ratio indicates that the market is undervalued. Higher dividend yield also means stocks could provide good returns. A higher price-book value also means that stocks look attractive for investment.

A comparison of P/E ratios of these countries shows that the NSE's Nifty has the second lowest ratio after Jakarta Composite Index of Indonesia. Nifty (historical) P/E ratio is 12.36 while Jakarta Composite ratio is at 10.49. The BSE's Sensex P/E ratio is 15.19 based on 2003-04 earnings.

Similarly, based on dividend yield, Nifty (2.51 per cent) is placed third after Malaysia (3.5 per cent) and Thailand (3.27 per cent). In terms of price to book value, Nifty stands number two after China.

Mr Andrew Holland, Executive President (Research), DSP Merrill Lynch, said: "Based on P/E ratio India is looking attractive in the long term."

He added that at the moment foreign investors have adopted a wait-and- watch approach. "Most of the investors are waiting for the Union Budget."

However, he said that investors should look at forward P/E ratio rather than historical. According to DSP Merrill Lynch estimates, Sensex is trading at P/E ratio of 11-12 times based on 2004-05 earnings. Early this year, most of the foreign investors were overweight on India compared to other emerging markets. But after the victory for the Congress and its allies at the Centre most of them had turned somewhat pessimistic on the Indian equity market. Due to this, stock prices in general have fallen by 25 per cent in the last one month. Other than the outcome of the elections, slowdown of Chinese economy and possibility of hike in interest rate in the US also affected the Indian market along with other emerging markets in Asia.

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